by Patrick Appel

A reader writes:

To play off of Richard Posner's comments, it's worth considering that consumers and bankers are fundamentally the same creatures they've been since the early 20th century.  They did not become spontaneously less competent, riskier, or greedier than their predecessors.  It's not the people who changed, but rather the regulatory environment they operated in. 

Back in the 60's nobody was taking out sub-prime mortgages without any money down or any documentation to prove they could pay off the loan.  This is not because they were smarter with their money, but rather that kind of mortgage simply did not exist.  Those types of mortgages came into being because the rules of the game changed.  Ultimately the financial system operates within the parameters we choose to set for it, and if we create incentives to take tremendous risks, then that's what the system does. 

Certainly in all things we need to consider individual responsibility, but we have to have a regulatory system that assumes a certain amount of irresponsibility.  We should permit one person or a few people to make foolish decisions in the interests of freedom and evolving our society.  But we have to put limitations in to prevent too many people from taking those chances because, when they do, it puts the entire system at risk.

Yves Smith has more along these lines.

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